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The United States Treasury recently introduced the MyRA account, designed to provide a retirement savings option for people without access to an employer-sponsored retirement plan. While the account certainly has its benefits, there are quite a few drawbacks, and most investors may be better off saving for retirement elsewhere. Here's what you need to know about the MyRA account, and what your other options may be.
What is the MyRA account?
The MyRA account is meant to be a "starter" retirement account, designed for people who want to start saving for retirement but don't have a retirement plan at work and don't have enough funding or investment knowledge to start investing in another type of retirement account.
Account holders can contribute up to $5,500 per year ($6,500 if over 50) and may continue to contribute until their total account balance reaches $15,000. All funds are invested in a newly created Treasury bond that delivers the same rate of return as the Government Securities Fund currently available to federal employees. The MyRA account can be funded in three ways:
- Direct deposits from an employer.
- Contributions from a checking or savings account.
- From the account holder's tax refund.
The MyRA account is structured like a Roth IRA, which means that while contributions aren't tax-deductible, qualified withdrawals after retirement age are tax-free. Plus, original contributions (but not investment gains) can be taken out at any time without penalty. Because of this feature, the MyRA serves a dual purpose -- building a retirement nest egg as well as an emergency fund.
Contributions are guaranteed not to lose money, and there are no costs or fees associated with the account. Accounts can be transferred or rolled over to a standard Roth IRA at any time, and they must be transferred once the balance reaches $15,000.
To be perfectly clear, the MyRA is not designed to be a standalone retirement account. According to a Treasury official, the account is intended to be "a bridge to private sector savings." In other words, the goal of the MyRA is to allow savers to build up enough of a nest egg to be able to take their account elsewhere and invest their money effectively.
Pros and cons
As I mentioned, the MyRA account has some positive aspects but also many drawbacks. Here's a list of the pros and cons:
|
Pros |
Cons |
|---|---|
|
No costs or fees |
Only one investment choice |
|
Guaranteed not to lose money |
The U.S. Treasury investment offered has low return potential |
|
Backed by the U.S. Treasury |
Maximum account balance of $15,000 |
|
No minimums -- can start with $1 |
|
|
Contributions can be withdrawn anytime |
|
|
May be eligible for the Retirement Savers Tax Credit |
By far, my biggest issue with the MyRA account is the availability of just one investment choice -- and the low returns that come with it. The Treasury bond the MyRA offers returned a dismal 2.31% in 2014 and has averaged just 3.19% over the past decade.
A better option
While I agree that people without employer retirement plans need to be able to save and invest, there are other options available. Specifically, traditional and Roth IRAs are more accessible to investors than many people think, and quite frankly, they're much better options than the MyRA.
Both types of IRAs allow investors to contribute as much as $5,500 per year ($6,500 if over 50), and just like the MyRA, many brokerages allow investors to open accounts with as little as a dollar. A Roth IRA is structured like the MyRA -- contributions aren't tax-deductible, but withdrawals in retirement are tax-free and original contributions can be withdrawn anytime. On the other hand, contributions to a traditional IRA could be tax-deductible, but your money is generally tied up until you reach age 59 1/2, and withdrawals after that point are treated as taxable income.
Whichever of these sounds like the better choice, there is one major factor that sets them apart from the MyRA. With a traditional or Roth IRA, you're allowed to invest in any stock, bond, or fund you want. If you're afraid of losing money, you still have the option to invest in low-risk investments such as Treasury securities, but you can also invest in higher-return asset classes such as stocks.
To illustrate why, consider this example. Let's say you have $10,000 to invest. At the MyRA's Treasury bond's average returns over the past 10 years, you could expect your money to grow to about $13,700 over the next decade. However, at the S&P 500's historic average of about 9.5%, your investment could grow to nearly $24,800. The difference is even more dramatic over long periods of time:
If you really want financial security in retirement, it's not enough to simply save money -- you need to invest. History has shown time and again that stocks outperform any other asset class over long periods.
The Foolish bottom line
In a nutshell, the MyRA is a decent way to start saving, but it isn't a great investment account. The vast majority of investors would be better off simply opening at IRA with the brokerage of their choice, even if they don't have a great deal of money to invest.
